Download INTERNATIONAL COMPETITION, RETURNS TO SKILL AND LABOUR MARKET ADJUSTMENT February 19, 2009

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generate wage differentials between sectors (Krueger and Summer, 1988), and thereby
increase workers’ incentives to switch industry.
Our paper makes two contributions. We begin by providing further evidence on the impact of
within-industry changes in competition on returns to skill using longitudinal matched
employee-employer data for Portugal. The data we use cover virtually all workers and firms
in the private sector over the 1986-2000 period, and are supplemented with industry-level
information on imports by the country of origin. The worker and firm dimensions of our data
are particularly important for our purposes, as they allow us to account for the role of firm
characteristics and composition effects.3 Our identification strategy involves two exogenous
measures of changes in international competition. First, following Cuñat and Guadalupe
(2005) and Guadalupe (2007), we exploit a strong appreciation of the Portuguese currency in
1989-1992 (over 25%) and pre-existing differences in cross-industry trade exposure in a
differences-in-differences estimation. Second, following Revenga (1992), Campa and
Goldberg (2001) and Bertrand (2004), we make use of industry-specific real exchange rates,
for which we have data for a later period (1991-2000). Based on both strategies, and on two
different skill definitions, we find strong confirmation for the hypothesis that within-industry
increases in international competition are an important determinant of rising wage inequality.
The second, and perhaps most important, contribution of this paper is to investigate whether
changes in international competition also cause skill upgrading and industry switching. Using
the aforementioned empirical strategies to identify exogenous changes in foreign competition,
we estimate transition probabilities between skills and/or industries (controlling for worker,
firm and sector characteristics) in a bivariate probit specification. We distinguish between
four alternatives: no change; moving industry; skill upgrading; moving industry and skill
upgrading. Our results provide strong support to the view that labour market adjustment to
globalisation involves significant worker movements across sectors and skills. Specifically,
we find that increased international competition induces skill acquisition, decreases skill
downgrading, and induces workers to move industry.
The remainder of the paper is organised as follows. In Section 2 we outline the empirical
methodology. In Section 3 we describe the data. Section 4 presents some descriptive statistics
about workers’ transitions. Section 5 discusses the empirical estimates, and Section 6
concludes.
3
See Abowd and Kramarz (1999) and Abowd et al (2006) for a detailed discussion of the effects of the
exclusion of these effects on earnings regressions.
3